14 May 2020
Introduction
Insolvency resolution regimes, globally, function as an exception to otherwise accepted norms of commercial law.[1] The Indian Insolvency and Bankruptcy Code, 2016 (“Code”), is no exception: a mere glance at the Code will display how it has a liberal sprinkling of non-obstante clauses.[2] From a specific dispute resolution mechanism, to an overarching carve out for insolvency resolution mechanism, the legislature has inserted non-obstante clauses in the Code as guidance of its intent. One would imagine that this would have ensured sufficient clarity for all stakeholders, avoided disputes and ensured timely insolvency resolution. Yet, as market participants try to understand the scope and intent of non-obstante clauses in the Code, such clauses continue to generate legal debate and litigation[3]. Perhaps, the stakes are too high for the parties to resist litigating. And some would argue not without good legal reason: after all, the Hon’ble Supreme Court has over the years identified exceptions[4] to the Latin maxim ‘leges posteriores priores contraries abrogant’ i.e. in the event two special statutes contain non obstante clauses, the non-obstante clause in the chronologically later special statute shall prevail[5].
Since the Code’s inception, the Apex Court has had to settle the position of law in relation to the interface of the Code with various statutes. The Apex Court has on a case-to-case basis taken the approach that the Code is “a complete code in itself”[6] and clearly overrides statutes or provisions in statutes that conflict with the Code, such as: (i) the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 in the matter of Innoventive Industries;[7] (ii) Tea Act, 1953, in the matter of Duncans Industries Limited;[8] and (iii) Maharashtra Housing and Area Development Act, 1976, in the matter of Rajendra K Bhutta.[9]
That said, the courts have also been swift to limit the boundaries of operation of the Code. Such as in the matter of B. K. Educational Services, the Apex Court observed that construing Section 238 of the Code to override provisions of the Limitation Act, 1963 (“Limitation Act”) would lead to “baby [being thrown] out with the bathwater”.[10] The Apex Court concluded that the Limitation Act would extend to IBC proceedings in light of Section 238-A.[11] Further, in the matter of Seven Hills, the Apex Court articulated that Section 238 of the Code cannot be read as ‘overriding [a public body’s] right – indeed it’s public duty to control and regulate how [the] properties [of such public body] are to be dealt with’.[12] Thereby, opining that the Code’s overriding powers would not extend to a scenario where properties and assets of a third party are involved.[13]
Against this backdrop, it may seem that the position of the law on the Code’s non-obstante clause is more or less settled. However, certain issues remain and will have to be adjudicated by the courts.
Code and Prevention of Money Laundering Act, 2002
Given that (i) the Prevention of Money Laundering Act, 2002 (“PMLA”) protects bona fide purchasers from money laundering offences relating to the purchased assets,[14] and (ii) the judicial precedents that third party bidders, acquiring companies for the purposes of rehabilitation, need to be shielded from “needless criminal prosecution”,[15] it would appear that assets acquired under the aegis of the Code would not be attached by the Directorate of Enforcement (“ED”) under the PMLA. However, in the absence of definitive jurisprudence on interplay of the Code and the PMLA, pursuant to an acquisition of a corporate debtor, ED sought to attach the assets of Bhushan Power and Steel Limited (“BPSL”) after the approval of resolution plan submitted by JSW Steel Limited (“JSW”) for BPSL by the NCLT, Principal Bench, for alleged bank fraud by BPSL.[16]
Instances such as BPSL precipitated to insertion of Section 32A in the Code,[17] also a non-obstante clause, which provides immunity to corporate debtors and acquirers of assets under the Code from any criminal or asset forfeiture proceedings initiated under law (“Amendment”)[18]. The Amendment was subsequently affirmed by the NCLAT in its final judgment whereby the attachment of assets of BPSL by ED was declared invalid.[19]
However, JSW’s resolution plan seems to have hit another roadblock as the NCLAT’s order has been appealed before the Supreme Court. The appeal inter alia has challenged NCLAT’s authority to provide immunity to JSW vide the Amendment. [20] It is expected that the Supreme Court’s decision may settle the position on overriding powers of the Code vis-à-vis the PMLA. This may be an interesting decision, given that the NCLAT[21] and the Delhi High Court[22] had in the past permitted attachment of assets of an insolvent entity, by ED, during the moratorium on the rationale that the Code and the PMLA do not override each other.
Code and Securities Exchange Board of India
Similarly, another appeal in relation to the powers of the Securities Exchange Board of India (“SEBI”) to attach assets during corporate insolvency resolution process (“CIRP”) is also pending adjudication before the Supreme Court.[23] This pertains to the CIRP of ‘M/s. HBN Dairies & Allied Ltd.’ (“HBN”), wherein prior to the admission of the insolvency application, SEBI had passed an order to attach and sell the assets of HBN.[24] Post the commencement of the CIRP, the NCLAT while reaffirming the decision of the NCLT[25], held that during the operation of the moratorium, by virtue of the overriding powers of the Code, SEBI was barred from taking any action against the assets of HBN.[26] Subsequently, an appeal was preferred by SEBI against the order of the NCLAT[27] before the Supreme Court. The Supreme Court, during the first hearing of the appeal, in the interest of maintaining the status quo, stayed the order of the NCLT[28] to the extent that SEBI is not required to return the title certificates of the assets of HBN and shall not create any encumbrance on such assets.[29]
From an asset valuation and deal certainty perspective, these aforementioned specific instances and other cases dealing with the attachment of assets of a corporate debtor by taxation authorities[30] have a significant bearing on the efficacy of the Code. The Supreme Court’s opinion in the matters of BPSL and HBN will hopefully pave the way for a just and fair resolution process.
Conclusion
The Supreme Court’s decisions are expected to bring the focus back on the extent of the Code’s overriding powers under Section 238 and the Amendment. Further, the courts may also review immunity under Section 32A of the Code and adjudicate upon the following issues that remain unaddressed by the Amendment:
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immunity to bidders (along with corporate debtors) acquiring the entire insolvent entity on a going concern basis, or pursuant to a scheme of compromise, in a liquidation under the Code; and
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immunity to bidders acquiring assets of a corporate debtor during the insolvency resolution process under Regulation 29 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Further, the extent of immunity to the bidder and the corporate debtor is only in relation to any ‘offence’ that may have been committed, prior to the initiation of the insolvency resolution process. Therefore, a clarification may be issued that such immunity will also extend to any civil proceedings and judicial orders relating to matters of similar nature.
Another question that needs a conclusive answer is whether statutory authorities, such as the ED and SEBI, that may have claims against insolvent entities can be considered as operational creditors in terms of the Code.[31] This would also allow such statutory authorities to claim the proceeds due to them in the resolution process and clearly bring them within the fold of the Code, and at the same time balance the policy objectives of different legislations with that of the Code.
* The authors were assisted by Mr. Kushal Rohira (Associate), and thank him for his assistance on this article.
For further information, please contact:
Vardaan Ahluwalia, Partner, Cyril Amarchand Mangaldas
vardaan.ahluwalia@cyrilshroff.com
[1] Jaw Lawrence Westbrook et AL., A Global View Of Business Insolvency Systems, World Bank, Martinus Nijhoff Publishers (2001).
[2] Generally, see, § 14, § 28, § 32A, § 37, § 53 and § 238, Insolvency & Bankruptcy Code, 2016.
[3] Generally see, Innoventive Industries Ltd. v. ICICI Bank and Ors., Civil Appeal Nos. 8337-8338 of 2017, Supreme Court judgement dated August 31, 2017; Duncans Industries Limited v. A J Agrochem, Civil Appeal No. 5120 of 2019, Supreme Court judgement dated October 4, 2019; Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Ors., Civil Appeal No. 12248 of 2018, Supreme Court judgement dated February 19, 2020; B. K. Educational Services Pvt Ltd vs Parag Gupta And Associates, Civil Appeal No. 23988 of 2017, Supreme Court judgement dated October 11, 2018.; Municipal Corporation of Greater Mumbai v. Abhilash Lal & Ors, Civil Appeal No. 6350 of 2019, Supreme Court judgement dated November 15, 2019.
[4] RBI v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424; KSL and Industries Ltd. v. Arihant Threads Ltd. and Ors., (2015) 1 SCC 166; Assistant Commissioner v. Indian Overseas Bank, 2016 SCC Online Mad 10030.
[5] Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71.
[6] Embassy Property Development Pvt. Ltd. v. State of Karnataka, Civil Appeal No. 9170 0f 2019, Supreme Court judgement dated December 03, 2019, ¶ 11.
[7] Innoventive Industries Ltd. v. ICICI Bank and Ors., Civil Appeal Nos. 8337-8338 of 2017, Supreme Court judgement dated August 31, 2017.
[8] Duncans Industries Limited v. A J Agrochem, Civil Appeal No. 5120 of 2019, Supreme Court judgement dated October 4, 2019.
[9] Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Ors., Civil Appeal No. 12248 of 2018, Supreme Court judgement dated February 19, 2020.
[10] B. K. Educational Services Pvt Ltd vs Parag Gupta And Associates, Civil Appeal No. 23988 of 2017, Supreme Court judgement dated October 11, 2018, ¶ 26.
[11] Ibid.
[12] Municipal Corporation of Greater Mumbai v. Abhilash Lal & Ors, Civil Appeal No. 6350 of 2019, Supreme Court judgement dated November 15, 2019, ¶ 47.
[13] Ibid.
[14] § 8(8), Prevention of Money Laundering Act, 2002; S. Ramesh Pothy and Ors. v. The Deputy Director Directorate of Enforcement, Chennai, MP-PMLA-3106/CHN/2017 (Misc.) and ors., Appellate Tribunal Under Prevention Of Money Laundering Act, New Delhi, order dated January 11, 2019; C Chellamuthu v. The Deputy Director Directorate of Enforcement, Chennai, CMA (MD) Nos. 104 to 110 of 2015, Madras High Court order dated October 14, 2015.
[15] Union of India v. Tech Mahindra Limited, Company Appeal Nos. 4 of 2014, Andhra Pradesh High Court order dated June 23, 2014; Also see M/s. Satyam Computer Services Limited v. Directorate of Enforcement, Hyderabad, Writ Petition No.37487 of 2012, Telangana High Court order dated December 31, 2018 (order under appeal before the Supreme Court in SLP No. 30975/2019).
[16] Economic Times, Bank fraud: ED attaches assets of over Rs 4,000 crore of Bhushan Steel, October 13, 2019. Available at: < https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-fraud-ed-attaches-assets-of-over-rs-4000-crore-of-bhushan-steel/articleshow/71555704.cms > (Last accessed on April 29, 2020)
[17] JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors., Company Appeal (AT) (Insolvency) No. 957 of 2019, NCLAT order dated February 17, 2020.
[18] Please also see for detailed analysis of Section 32A, Indian Corporate Law – Cyril Amarchand Mangaldas Blog, IBC Second Amendment Bill, 2019: Finishing Touches to the Indian Restructuring Landscape, December 18, 2019. Available at: < https://corporate.cyrilamarchandblogs.com/2019/12/ibc-second-amendment-bill-2019-finishing-touches-to-the-indian-restructuring-landscape/ >.
[19] Supra at note 17.
[20] Business Times, JSW Steel in quandary as Apex Court agrees to hear Bhushan Power promoter’s plea, March 9, 2020. Available at: < https://www.thehindubusinessline.com/companies/jsw-steel-in-quandary-as-apex-court-agrees-to-hear-bhushan-power-promoters-plea/article31015741.ece > (Last accessed on April 29, 2020).
[21] Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018, NCLAT order dated May 2, 2019, ¶ 14.
[22] Deputy Director Directorate of Enforcement, Delhi v. Axis Bank and Ors., 2019 SCC Online Del 7854, ¶ 146.
[23] Securities Exchange Board of India v. Rohit Sehgal & Ors. Civil Appeal No(s). 5089/2019.
[24] Bhanu Ram & Ors. v. HBN Diaries & Allied Limited, CP No. IB 547 (PB)/2018, NCLT Principal Bench orders dated August 14, 2018 and April 30, 2019.
[25] Ibid.
[26] Mr. Bohar Singh Dhillon v. Mr. Rohit Sehgal, Company Appeal (AT) (Insolvency) No. 665 of 2018, NCLAT order dated May 9, 2019.
[27] Supra note 23.
[28] Supra note 24.
[29] Securities Exchange Board of India v. Rohit Sehgal & Ors. Civil Appeal No(s). 5089/2019, Supreme Court order dated June 17, 2019.
[30] Leo Edibles & Fats Limited v. The Tax Recovery Officer, Writ Petition No. 8560 of 2018, Andhra Pradesh High Court order dated July 26, 2018; Ritesh Prakash Adatiya, Interim Resolution Professional Electra
Accumulators Ltd. v. Deputy Commissioner of State Tax, (Enforcement) Division-8, C.P. No. (I.B.) 188 of 2018, NCLT Ahmedabad Bench order dated January 2, 2020.
[31] In JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors., Company Appeal (AT) (Insolvency) No. 957 of 2019, NCLAT order dated October 25, 2019, the NCLAT observed that “[p]rima facie, we are of the view that if the assets are seized by the Enforcement Directorate and finally hold that the assets were purchased out of the ‘proceeds of crime’, in such case, the amount as may be generated out of the assets will come within the meaning of ‘Operational Debt’ payable to the Enforcement Directorate for which it may file claim in terms of the Insolvency and Bankruptcy Code, 2016”. However, this issue was not conclusively determined by the NCLAT in its final order in the matter (NCLAT order dated February 17. 2020).
